Case Study

Case Material            Martin and Carrie Moss are a married couple. They both worked for an advertising firm for 25 years. At age 47, Martin and age 42, Carrie retired and moved to the small town of Pahrump, NV, which has a population of approximately 6,500 residents. When the Moss moved to the town, they decided to start a daycare business in their home called Gram’s Haven.            Gram’s Haven is licensed by the state. The state charges an annual fee of $225 to maintain the license. Insurance is required for $3,840 annually. The facility is licensed to care for a maximum of six children. The Moss charge a fee of $800 per month for each child. The monthly fee is based on a full day of care, from 8:00 a.m. to 4:00 p.m. If additional time is required beyond 4:00 p.m., parents must pay an additional charge of $15 per hour for each child. The couple provides two meals and a snack for the children. The cost of the meals and snacks is $3.20 per child per day. There are six children currently enrolled.            The facility is very nice. It is an 820 square foot addition to their home that was built in 1964. The Moss purchased the home and completed the renovations for $79,500, and they believe the addition has a useful life of 25 years. The facility has a large open space for play, reading, and other activities. There is a section for sleeping which contains small cots. The facility is equipped with a small kitchen, two bathrooms, and a small laundry area. The daycare increased the Franks’ utility cost by $50 each month.            During the first week of operations, the washer and dryer stopped working. Both appliances were old and had been used by the couple for many years. The old appliances cost a total of $440. While a laundry room was not initially necessary, it became increasingly important for laundering the soiled clothes of the children, blankets, and sheets. A company nearby, Sagan Laundry and Dry Cleaning, can launder clothing for the Moss, including pick-up and delivery, for $52 per month. Alternatively, the Moss can take clothes to the laundromat once a week, three miles away (one way). The applicable mileage rate is $0.56/mile. They can launder the clothes themselves for $8 per week. The self-service alternative does not include detergent or fabric sheets. The couple would need to purchase these items to use the laundromat. Purchasing laundry supplies in bulk from WashMart would cost $35 every quarter. The final alternative is for the Moss to purchase a washer and dryer. The cost of the appliances is: washer $420 and dryer $380. The additional accessories for both appliances, needed for installation, cost $43.72. The store will deliver the appliances at a total cost of $35. The cost of installing the appliances is free. Both appliances are expected to last eight years. According to the manufacturer, the washer will increase energy costs by $120 per year. The dryer will increase energy costs by $145 per year.The Moss needs some assistance in decision-making and evaluation. They have contacted Miranda Hobson, their accountant, to provide some advice. 

RequirementsRespond to the following Case Discussion Questions to help Martin and Carrie make their decisions.

Case Discussion Questions:(If necessary, the Franks will use straight-line depreciation. For monthly calculations, use 4.33 weeks per month.) 1. Consider the different types of costs discussed in our course BACC531, Managerial Accounting. List all the costs you can identify as discussed in the case; provide one specific example of each and brief reason why to classify as such. An example is provided below.Cost  Specific Example  ReasonFixed cost                    Annual license fee of $225            The license fee does not change regardless                                                                                                                                                                of activity 2. Based on the information provided, what information is relevant to purchasing the appliances? What information is irrelevant to the decision to purchase the appliances? Why? Are there any other cost concepts you can derive that are not explicitly addressed in the case? 3. What could it cost the couple to launder clothes? Show your detailed calculations for each. 4. The couple has made a significant investment in this business. How long will it take for the couple to recoup their investment? Is the time required to recoup the investment a good measure of the success of the company? If not, how would you measure the success of the company? Explain. 5. As Miranda Hobson, prepare a letter to the Moss advising them on their laundry needs. What is your recommendation and why? 6. The Moss has a wait list for their daycare. They can hire an employee for $9 per hour for 40 hours each week. With the additional employee, the Moss can accept three additional children. Should the Moss hire an additional employee? Show your detailed calculations. 7. The Moss’ home can accommodate a maximum of nine children. They can move the daycare from their home to rented space in town, which can accommodate up to 14 children. The space will cost $650 per month, and the utilities will cost $125 per month. Additionally, insurance will now cost the Moss $5,000 per year. Per Nevada state regulations, each adult can supervise no more than three children. Assume you are Miranda Hobson, prepare a letter to the Moss advising them on their space options. Should they continue to operate the facility at home, or should they rent space in town? How many children should they accept? How many employees will they need to hire? Show your detailed calculations for each scenario. 

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